A first set of issues concerns how Brexit might, in substantive terms, affect demand for your firm’s products. It’s easy to become so bogged down in the fascinating policy and internal change management issues that one misses more basic demand points. At the more prosaic level, Brexit might affect GDP, both in the shorter- and longer-terms. We help clients think through how demand for their products is related to GDP and how it changes in response to short-term fluctuations or longer-term trend shifts.
The period around Brexit and the longer-term may involve fluctuations in the value of Sterling relative to other currencies. Which movements are most plausible in the shorter- and longer-terms, and how might this affect your business?
How might Brexit affect the rest of Europe? Could it lead to extra EU members leaving the EU or joining the euro? How might your firm react? For example, might that mean you should expect less volatility for euro to zloty exchange rates? Could that affect your hedging operations or the prices you charge to Polish clients? Could it create investment opportunities, speculating on exchange rate movements?
UK policymakers are likely to respond to the macroeconomic movements associated with Brexit in the number of ways. The Bank of England already cut interest rates. How might the future path be affected? How might fiscal policy respond? How would your business be affected by that? Does it mean extra business taxes potentially affecting you? Might it mean extra spending on things you supply (e.g. procurement advisory services for government departments) or on things that could affect your sector (e.g. extra housing construction)?
Next, the process of Brexit might create sales opportunities. That could be particularly relevant if your business provides advisory services in areas such as regulation, recruitment, business strategy or change management. Brexit itself might affect demand for your products if your products have a patriotic, or Britishness or European-ness, historical, current-affairs-related or landscapes-related angle. For example, if you sell films, consumers might want movies with topics that help them think through or navigate the implications of Brexit for their lives, much as there were many movies made in the late 1980s about the opening up of Russia or the fall of the Berlin Wall in the 1990s.
Brexit might lead to new trade deals with the rest of the world. Which ones might happen and which won’t? Which deals create the best opportunities for your businesses to sell products abroad or to import useful inputs? How might trade with the rest of the world evolve in the future and how might that affect your business?
Could restrictions on free movement of persons affect your staffing or affect demand for your products? What restrictions are plausible? Might there be special visa exemptions for certain kinds of staff in your sector? Could you benefit if there were freer migration between the UK and non-EU countries? What will happen to the salaries you need to pay your staff?
How might changes to regulation affect your production or demand with respect to the EU? For example, will the Working Time Directive go? Could that affect your business if, for example, you do a lot of night-time production? How about with the non-EU? For example, if the UK has a closer relationship with the US and Canada, might that affect your firm’s ideal working hours? What categories of regulation that matter to you are more likely to be affected — e.g. Product regulation? Consumer protection? Environmental? Health and safety?
How might changes to intellectual property affect you? Presumably the UK will exit the EU patent exhaustion area, with great significance for pharmaceuticals. But will the UK be in the Unitary Patent? Will it remain in the European Patent Organisation? What will happen to design rights? Will there be a difference between the treatment of OHIM-registered design rights and those registered in the UK? What about copyright? What about digital property rights?
How might the structure of the UK economy change in response to Brexit? For example, might there be more manufacturing relative to services, because less free movement of labour tends to lead to greater capital intensity in GDP? More business services relative to financial services? Could the English West coast and Wales, facing the Atlantic, gain relative to the Europe-facing South-East? How could this affect your business? (e.g. Could it change real estate prices for you? Could it change the seasonality of demand?)
What new opportunities might be created for you by changes to competition or by the mistakes of your competitors? Could competition law change? What about mergers? Will it be harder for your firm to take over EU competitors? Will it be easier or harder for US rivals to buy you out?
How might taxes or tax reliefs be affected? Could there be tax reliefs for your sector that the UK government has up to now been prevented from providing because of state aid rules? Might Brexit change that? Does Brexit mean there might be more or less restrictive rules on tax avoidance or the tax treatment of debt? Could that affect the optimal way for your business to fund takeovers?
This is by no means a comprehensive list of the potential issues Brexit can create for businesses. And as well as there being additional issues in some sectors, some of the issues above may be irrelevant for you and would not be considered. But it is an illustrative inventory, showing some of the kinds of issues we have been advising clients upon.
At present only around 0.5 per cent of £180bn in LGPS assets are in infrastructure, or around £2bn. The government believes that this is partly because LGPS are too small to invest properly in infrastructure. It notes that in countries with larger pooled public pension schemes, typical infrastructure investment is around 8 per cent — or around £14½bn, some £12½bn more than at present.
The following table shows recent determinations of the allowed return on capital for infrastructure assets by European regulators. If the newly created British wealth funds were to move their capital into infrastructure, they will need to move them out of some existing investments. It is likely that they would need to sell some of their current equity to invest in infrastructure. If they want to keep the same overall portfolio return they would need to move some other funds into riskier equity since allowed returns on capital are lower than returns on equity, as illustrated indicatively in the table below.
Table 1: Recent determination of the cost of capital for infrastructure
Source: regulators’ websites.
Note: return on capital showed in the tables are set on the basis of different assumptions (e.g. pre/post-tax) and should thus not be compared across countries. In jurisdictions where the return on capital is set on a pre-tax basis, the overall pre-tax weighted cost of capital may be smaller than the post-tax return on equity showed in the table.
EE calculations based on Bloomberg data.
In the figure above we can notice that, over the last month, the asset betas of the materials and energy sectors have experienced a sharp increase, whilst the beta of the industrial has decreased. Such changes can be rationalised as indicating a re-pricing of risk for commodity driven sectors (i.e. sectors that benefit from rising commodity prices) and industrial sectors (i.e. sectors that benefit from falling commodity prices). More specifically, markets now perceive the former as riskier than the latter (whilst these sectors were perceived as equally risky in August).
Such re-pricing of risk might be due to the poor performance of commodities in September, after a rally recorded in the second half of August.
EE calculations based on Bloomberg data.